April 17, 2000

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, DC 20549

File No. S7-03-00
SEC Release Nos. 33-7793; 34-42354
Supplementary Financial Information

Dear Mr. Katz:

The SEC Regulations Committee of the American Institute of Certified Public Accountants (the SEC Regulations Committee) is pleased to respond to the Commission's request for comments on its proposed changes to financial disclosure requirements as presented in Release Nos. 33-7793/34-42354, Supplementary Financial Information (the Release).

Summary

We support efforts by the Commission, the Financial Accounting Standards Board and others to identify areas in financial reporting where users require additional and/or more transparent financial information. We also support the Commission's efforts to curb abusive earnings management practices and to improve the overall quality of financial reporting. However, we have reservations about the current proposal to require detailed disclosures of loss accruals and certain long-lived assets.

We believe the information required by the proposal goes beyond what is needed at this time. As a result, we believe companies will incur incremental costs that may not be warranted. We suggest that moderate steps be taken currently and that the Commission defer the extensive changes proposed in the Release until the Commission and investors can assess whether these more moderate steps combined with the results of the various efforts aimed at curbing earnings management have been sufficient. Specifically, prior to requiring companies to report extensive supplemental financial information, we believe that the Commission should (a) permit the various recent changes aimed at reducing earnings management abuses to take effect; (b) clarify the requirements of Schedule II to address the acknowledged problems of inconsistency and noncomparability; and (c) allow investors an opportunity to determine whether the disaggregated information required under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, is sufficient to address the need for more detailed information.

Our recommendations and rationale are discussed further below.

Specific Comments

Transparency and Earnings Management - - The Commission's proposal cites "an apparent increase in abusive earnings management" and a "lack of transparency in some aspects of financial reporting" as the basis for the proposal to provide extensive detailed information about loss accruals and long-lived assets. We observe that a number of significant initiatives and changes recently have been put in place in an attempt to address both these concerns. For example:

• the stock exchanges have instituted changes in corporate governance to strengthen the role of audit committees,
  
• the Commission has instituted requirements for audit committee reporting and independent auditor reviews of interim financial statements,
  
• the Auditing Standards Board has adopted standards requiring auditors to discuss the quality of a company's accounting principles with the audit committee and to discuss certain matters quarterly with the audit committee, and
  
• the Commission's staff has released Staff Accounting Bulletins dealing with materiality, restructuring and impairment charges, and revenue recognition.

Investors, the Commission, preparers and auditors have not yet had an opportunity to assess the aggregate result of these varied and recent changes to our financial reporting culture. Clearly there is an expectation that abusive earnings management will be curbed and that the quality of financial reporting will improve. And clearly the sum total of these changes will increase the costs incurred by public companies. Accordingly, before requiring companies to incur further (and likely significant) costs to provide supplemental financial information, we encourage the Commission to assess whether the outcome of these collective efforts is sufficient.

Schedule II - - We acknowledge that the current requirements for Schedule II are not consistently understood or interpreted. We believe the primary reason for this is the fact that the terminology "valuation and qualifying accounts and reserves" is not currently used in generally accepted accounting principles and is not defined in the Commission's rules. A secondary reason, in our view, is the need for guidance regarding what constitutes an account that is sufficiently material to report on this Schedule.

We do not believe the Commission's proposal related to loss accruals provides clarity regarding the information that should be disclosed. We are unable to identify the concept that underlies the Commission's disclosure requirement and, accordingly, we believe preparers will find it very difficult to consistently understand and apply the proposed rule. Further, the examples of loss accruals and valuation accounts identified by the Commission present a confusing mix of concepts that make it difficult to understand the Commission's underlying framework. For example:

• Does a vacation accrual (covered by SFAS No. 43, Accounting for Compensated Absences) meet the Commission's definition of a "loss accrual"?
  
• Does a severance accrual (covered by SFAS No. 112, Employers' Accounting for Postemployment Benefits) meet the Commission's definition of a "loss accrual"?
  
• Why does an inventory writedown to market (when cost is higher than market) represent a valuation allowance? As the Release points out, the writedown forms a new cost basis.
  
• Does the requirement to disclosure inventory writedowns to market mean that a writedown for long-lived assets held for use also represents a "valuation allowance"?
  
• Why do unamortized discounts or premiums represent the type of "valuation allowance" that is of interest or concern to investors?

Another concern with respect to the Commission's proposal on the disclosure of loss accruals is the manner in which the information would be presented. Making this supplemental unaudited information as prominent as the financial statements elevates extensive unaudited data to a level that is parallel with audited historical financial statements. If the Commission does not believe the supplemental financial information is important enough to subject it to auditing tests, why would the Commission believe it should be given equal prominence? In addition, isn't the Commission potentially confusing investors regarding the quality and importance of "supplemental" unaudited information by placing it on a level parallel with the audited historical financial statements?

We believe the current approach to providing supplemental financial information is sufficient. Accordingly, we recommend that the Commission leave the requirement for and location of Schedule II intact and modify the requirements of Schedule II to clarify the accounts to be disclosed on that schedule. Specifically, we suggest that the information on Schedule II be required for those liability line items and asset valuation allowance line items that either generally accepted accounting principles or Regulation S-X require to be disclosed on the face of the balance sheet or in the notes to the financial statements. For example, Item 5-02 (4) of Regulation S-X requires the disclosure of "allowances for doubtful accounts and notes receivable" and Item 5-02 (20) of Regulation S-X requires the disclosure of "any [current liability] in excess of 5 percent of total current liabilities." Another example is paragraph 43 of SFAS No. 109, Accounting for Income Taxes, which requires the disclosure of the total valuation allowance recognized for deferred tax assets. Tying the requirements for Schedule II to the line items disclosed under generally accepted accounting principles and Regulation S-X would result in a consistent approach toward defining which line items are sufficiently important and material to warrant further disclosure.

A final concern about the proposed disclosure of detail information about loss accruals relates to the confidentiality and sensitivity of tax and litigation accruals. We believe that the existing requirements of generally accepted accounting principles (i.e. SFAS No. 5, Accounting for Contingencies, and SFAS No. 109, Accounting for Income Taxes) combined with the requirements in Item 303 of Regulation S-K (Management's Discussion and Analysis) to discuss significant items affecting current year results as well as known events and uncertainties that could materially affect future operations or cash flows are sufficient to insure that investors are appropriately informed about the risks associated with these contingencies.

Under existing professional standards, management and the auditor must assess the adequacy of the tax provision in financial statements, carefully evaluating sophisticated and sensitive client issues. Disclosure of the underlying details would not serve the public interest. To explain the complex nature of corporate tax law in a way that would render the data meaningful would require either exceedingly long discussions or the use of technical terms that are beyond the level of understanding of most financial statement users.

In addition, we observe that the availability of an auditor's tax accrual workpapers was a difficult issue that was litigated extensively until the IRS adopted a position to balance public interest considerations. The IRS added a section to the Internal Revenue Manual, noting that the auditor's tax accrual working papers should be the last resort for examining agents, and should not be sought except in rare instances. In this change, the IRS recognized that while the accountant's tax accrual workpapers would be helpful in a tax audit, routine disclosure of this sensitive information could have a chilling effect on CPA-client communications and potentially impair the accuracy of the tax accrual in the financial statements. These same public interest issues should be considered when the Commission considers asking for disclosure of similar information.

Disaggregated Information - - With respect to the request by certain investors for additional information related to capital allocation decisions and depreciation, we would observe that the October 1998 letter the Commission received from AIMR precedes the changes instituted by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. That new financial reporting standard was issued in response to the request from analysts for improved disaggregated information that would help them "predict the overall amounts, timing, or risks of a complete enterprise's future cash flows" (paragraph 44 of SFAS No. 131). The new standard specifically requires the disclosure of capital expenditures and significant noncash items (including depreciation) because that information "improves financial statement users' abilities to estimate cash-generating potential and cash requirements of operating segments" (paragraph 94 of SFAS No. 131). We believe that prior to requiring extensive detail disclosures of the activity in long-lived asset accounts, the Commission should seek feedback from investors as to whether the new information provided by SFAS No. 131, combined with the existing requirements of Item 303 of Regulation S-K (Management's Discussion and Analysis), are now sufficient to meet their needs.

Incremental Costs to Preparers - - Although we have not conducted a survey of our members to determine the cost of providing the supplemental information proposed in the Release, we have several observations that we believe should be considered in assessing the cost of the proposal.

• The Release states that increased costs will arise from the preparation and printing of these disclosures but that because " the information should be readily available from each registrant's books and records, we do not believe these costs would be significant". In fact, it is our experience that the detail information requested by the Commission's proposal is not gathered on a consolidated basis during the normal process of preparing consolidated financial statements. This information may indeed be available, but in the books and records of the individual operating entities, not in the aggregate. Accordingly, there will be incremental costs to gather, analyze and review these supplemental financial disclosures.
  
• Whether the information is audited or not, auditors and audit committees will need to read and understand and make inquiries about the supplemental information, which adds to the cost burden.
  
• If the information is unaudited, company's will ultimately incur incremental auditor costs if underwriters for a securities offering request that the independent auditor subject the data to procedures under SAS No. 72, Comfort Letters.
  
• We are skeptical about the appropriateness of extrapolating one company's estimate to the entire population of SEC registrants, particularly considering the diversity of industries, legal structures, countries and internal reporting systems.
  
• We question whether it is appropriate to assume that only 2,900 registrants will be affected by the Release. We do not believe the number of registrants currently reporting information on Schedule II is an appropriate gauge of the number of registrants that would be required to report supplemental information as defined in the Release.
  
• Because this specific proposal is an extension of the Commission's existing efforts to address earnings management concerns, we suggest that the Commission consider whether the incremental costs resulting from this Release are necessary in light of the numerous earnings management initiatives that have already been implemented.

Other Comments - - The Commission has asked several other questions that we would like to address. Specifically:

1. Are there circumstances where registrants may appropriately exclude disclosure about loss accruals related to litigation because of concerns about confidentiality while still conforming with GAAP? If so, please describe such circumstances in detail.

The Commission's proposals for disclosing litigation accruals and tax contingency accruals go well beyond the existing requirements of GAAP. Ergo, it is completely consistent with GAAP to exclude these contingencies from the detail disclosure requirements set forth in the Release.

As indicated above, we believe that the existing requirements of GAAP, combined with the requirements for MD&A, are sufficient to inform investors about the effects of litigation and tax contingencies on earnings. SFAS No. 5, Accounting for Contingencies, already requires disclosure of the nature of the loss accrued for and, when necessary, the amount accrued. Even when no accrual is appropriate, SFAS No. 5 requires disclosure when there is an exposure that is reasonably possible and significant. Item 303 of Regulation S-K (and the corresponding rules for SB and foreign filers) requires registrants to discuss known trends, demands, events or uncertainties that are reasonably likely to affect liquidity or future operations in a material way, as well as those that have significantly affected the current year's results. We believe that the vast majority of registrants appropriately comply with these disclosure requirements while still maintaining the level of confidentiality needed to protect sensitive information.

The type of detail disclosure that is proposed in the Release would place the registrant (and thus its shareholders) at a disadvantage when attempting to resolve matters that are, by definition, uncertain. We do not believe it is possible to identify all the various circumstances in which these incremental disclosures would put registrants in the extremely difficult position of balancing disclosure and accrual requirements for highly judgemental matters. We also do not believe it is appropriate or feasible to redraft the proposal in a way that attempts to scope out some but not all litigation and tax contingencies. Rather, we believe litigation and tax contingencies should be outside the scope of this proposal. Prior to requiring this additional disclosure, we believe is incumbent upon the Commission to substantiate its position that (a) investor needs and earnings management risks related to these specific types of contingencies are significant and (b) existing requirements are insufficient.

2. Should the disclosures concerning valuation and loss accrual account activity be required when interim financial statements are presented?

At this time, we see no basis for requiring this information, or Schedule II, when interim financial statements are presented.. We would expect that the costs of providing this information could escalate significantly if required quarterly. A quarterly requirement for this information could also make it more difficult for certain registrants to comply with the short reporting timeframe for interim financial statements.

3. Should the disclosures concerning changes in property, plant, equipment, and intangible assets and related accumulated depreciation, depletion, and amortization be required when interim financial statements are presented?

No. See response to 2.

___________________________________________

We would be pleased to discuss our comments with you at your convenience.

Sincerely,

Amelia A. Ripepi
Chair
AICPA SEC Regulations Committee